Oracle Accounting - Accounting Basics

8/6/2019 Oracle Accounting - Accounting Basics

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Oracle Accounting

Understanding Accounting from Techies Mind

Indeed, this is one of good area, where most of techies have lot of confusion and illusion about whenaccounting comes. Many of consultant came from Technical background and gradually moved into

doing some techno -functional role or pure functional role, thus it is essestintial to understand thebasic accounting and Guided principal .

Normally, there are two basic accounting methods available in the business world:

y C ashy A ccrual

A nd most of the ERP accounting products weather its SUN system, Oracle financial or S AP havefunctionality to capture on the basis of set up.

Then want is the difference:

Cash Basis Accounting This is what "Based on Realization"

We Most of us use the cash method to keep track of our personal financial activities.

The cash method recognizes revenue when payment is received, and recognizes expenses when cashis paid out.

For example, our local grocery store's record is based on the cash method. Expenses are recordedwhen cash is paid out and revenue is recorded when cash or check deposits are received

If we summarize, under the cash basis accounting, revenues and expenses are recognized as follows:

y Revenue recognition: Revenue is recognized when cash is received.y Expense recognition: Expense is recognized when cash is paid.

Take a note the word "cash" is not meant literally - it also covers payments by check, credit card,barter, etc.

Moreover it is not standard method in compliance with accountings matching principle.

Accrual Basis AccountingThis is what "Based on Recognition"

The accrual method of accounting requires that revenue be recognized and assigned to the accountingperiod in which it is earned. Similarly, expenses must be recognized and assigned to the accountingperiod in which they are incurred.

Then the underline question is what is accounting Period, Let explain like this normally a companytracks the summary of the accounting activity in time intervals, which we normally called asA ccounting periods. These periods are usually a month long. It is also common for a company tocreate an annual statement of records. This annual period is also called a Fiscal or an A ccounting Year.


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In the accrual method relies on the principle of matching revenues and expenses. This principle saysthat the expenses for a period, which are the costs of doing business to earn income, should becompared to the revenues for the period, which are the income earned as the result of thoseexpenses. In other words, the expenses for the period should accurately match up with the costs of producing revenue for the period.

Take a case:C ompany is doing a business and they have to pay sales commissions expense, sosales commissions expense should be reported in the period when the sales were made(and not reported in the period when the commissions were paid). Similarly,Salary/Wage to employees are reported as an expense in the week/month when theemployees worked and not in the week/month when the employees are paid. If a

company agrees to give its employees 2-month equivalent salary of its 2006 revenues as a bonus onJanuary 25, 2007, the company should report the bonus as an expense in 2006 and the amountunpaid at December 31, 2006 as a liability. This is most simple kind of matching principal normallyhas.

In general, there are two types of adjustments that need to be made at the end of the accountingperiod.

1. The first type of adjustment arises when more expense has been recorded than was actuallyincurred or earned during the accounting period.

2. Similarly, there may be revenue that was received but not actually earned during theaccounting period. A lso known as Un-earned Revenue.

The accrual method generates tax obligations before the cash has been collected (because revenueleads to tax and revenue is recognized against receivable and not against receipt of money).

If we summarize, under the accrual basis accounting, revenues and expenses are recognized asfollows:

y R evenue recognition : Revenue is recognized when both of the following conditions are met:o Revenue is earned

i.e. when products are delivered or services are provided.o Revenue is realized or realizable.

i.e. either cash is received or it is reasonable to expect that cash will bereceived in the future.

y Exp ense recognition : Expense is recognized in the period in which related revenue isrecognized (Matching Principle).

Timing differences in recognizing revenues and e xp ensesVarious accounting books did mention four potential timing differences in recognizing revenues andexpenses between these of two. Just to recap of those:

a. A ccrued Revenue: Revenue is recognized before cash is received.b. A ccrued Expense: Expense is recognized before cash is paid.c. Deferred Revenue: Revenue is recognized after cash is received.d. Deferred Expense: Expense is recognized after cash is paid.

Com p are with a Case to e xp lain these two methods

Your company purchase a new Laptop on credit in May 2007 and pay $1,500 for it in July 2007, twomonths later.


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Under the both case see how this makes a difference:

y Using the cash method accounting, you would record a $1,500 payment for the month of July, the month when the money is actually paid.

y Under the accrual method, you would record the $1,500 payment in May, when you takethe Laptop and become obligated to pay for it.

P ros and cons of these Two accounting method

Maintence : The cash method is easier to maintain because you don't record income until you receivethe cash, and you don't record an expense until the cash is paid, where as in the accrual method, youwill typically record more transactions.

C ash-basis accounting defers all credit transactions to a later date. It is more conservative for theseller in that it does not record revenue until cash receipt. In a growing company, this results in alower income compared to accrual-basis accounting.

Do you what is meant by GAA P? No, I don't know, but knows most of ERP follows these. Lets explain this way:The word"generally accepted accounting principles" (or "G AA P") consists of three important sets of rules:

(1) The basic accounting principles and guidelines,(2) The detailed rules and standards issued by F A SB(Financial A ccounting Standards Board and itspredecessor the Accounting Principles Board ( A PB)(3) The generally accepted industry practices.

Normally Standard G AA P will have various guided Principal, such as

y Economic Entity A ssumptiony Time Period Assumptiony C ost Principley Matching Principley Revenue Recognition Principle

Will take a seprate case of some of them to understand in better way.

If you want to know more about G AA P, weather US-G AA P, UK-G AA P , refer wikipedia

ER P/O racle Financials Oracle Financials have been developed to meet G AA P requirements as well as the special needs of different countries. For example, in Oracle Payables you can choose whether to record journal entriesfor invoices and payments on an accrual basis, a cash basis, or a combined basis where accrual

journal entries are posted to one set of books and cash basis journal entries are sent to a second setof books.

Understanding Balance Sheet from Techies Mind

Do you know one of Key Financial Report aka Balance Sheet is a basically position statement,which describes the financial position of assets & liabilities of

y your company/firmy as on a particular date

If you take any accounting book, this can be best defined as " a statement of the financial position of an enterprise as at a given date, which exhibits assets, liabilities, capital, etc."


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W hy Balance Sheet R equired ?

Obvious question why this is required? the Only reason is because the the legal rules ( C ompanies Act)enforce companies to publish such report.

y A Balance Sheet as on the last day of the financial yeary A Profit & Loss Account for the financial year.

In accounting world , balance sheet should reflect true and fair view in term of shareholderequity .

Balance sheet - techies definition

A ssets and Liabilities are continuously changing with Business activity. To understand the financialposition of the Business, it is necessary to FREEZE the values of financial components at acertain point in time. These values, or Balances, are used to construct a balance sheet which showshow the owners equity is represented by the various categories of assets and liabilities.

Do this have any Structure ?

Yes, If you see different accounting book, we will find two different form of Balance sheet,

y H orizontaly Vertical


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The only difference between these two are required to give the corresponding amounts for thepreceding financial year ( C omparatives) for all the items shown in the balance sheet.A typical Balance sheet can be best represented as:

This is based out of accounting equation, which I have discussed in one of old post :

A ssets = Owners Equity + Outside LiabilitiesA = OE + OL

in the world of double entry system, the rule of thumb is "In the double-entry accounting system,every transaction is recorded by equal amounts of debits and credits"

A (DEBIT)= OE + OL( C REDIT)

If you analyze the above sheet in term of accounting equation , this can be best understood as:


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I s there any limitation for Balance sheet ?

Yes, there are (adopted from Jep Robertson Notes )

y A s most most assets and liabilities are based out of historical cost.y Judgments and estimates are used in determining many of the items.y The balance sheet does not report items that can not be objectively determined.y It does not report information regarding off-balance sheet financing.

W here is my Balance sheet re p ort within O racle

Balance sheet reports in Oracle are one of the FSG report which need to fine tune base out of thecustomer requirement, and this can be executed from the report section within GL responsibility.

Understanding P rofit and Loss ( P& L) from Techies Mind

y In accounting world, an Income Statement is called as "Profit and Loss Report". In addition,the word Revenue is often used in place of the word Income. A n Income Statement is used to


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inform you about the income earned, expenses incurred, and the total profit or loss in aparticular period. Two common periods for creating an income statement are monthly andannually.

y This report summarizes all Income (or sales), the amounts that have been or will be receivedfrom customers for goods delivered or services rendered to them, and all expenses, the coststhat have arisen in generating revenues.

y Normally Income A ccounts accounts are used to track income earned during the process of operating your business. The income of a business comes from sales to customers or fees forservices or both. Some of the common names for income accounts are: Income from Sales,Income from Freight, Income from misc. sources as property, shares.

y A s discussed in last post Balance Sheet is a position statement whereas Profit & LossA ccount is a flow statement.

y The need of P & L report is enforced because of companies A ct, which enforce to produceBalance sheet and P&L account.

y A Balance Sheet as on the last day of the financial yeary A Profit & Loss Account for the financial year.

P rofit and Loss A / C

What you suppose to remeber is :

y P&L A /c is also called Income Statement.y Income is calculated as the difference between revenues and expenses.

o Revenues: from operationso Expenses: specific product/service/period

y A ccountants have agreed to use the accrual basis of accounting rather than the cash basis

The term Revenue and expense

y R evenues - gross increases in owners equity arising from business operations/deliverygoods-services to customers

y Exp enses - decreases in owners equity that arise because goods or services are deliveredto customers

In term of accounting, this can be described as:

R evenue Account : This is the income account. Whenever a revenue account balance is changed, it


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leads to a change in the Assets / Liabilities account. Revenue account is not a control account, itstreated as an operative account. A t the beginning of a new accounting cycle, this account is turned tozero. Entire balance is transferred to the retained earnings account.

Exp ense Account : This is the operations expenditure account. Whenever an expenditure accountbalance is changed, it leads to a change in the Assets / Liabilities account. This account behaves justlike the Owners equity account as an increase in this account essentially means a decrease inowners equity. Expense account is not a control account, its treated as an operative account.A t the beginning of a new accounting cycle, this account is turned to zero. Entire balance istransferred to the retained earnings account.

Spliting the above , the balance sheet can be drived on the basis of these. You can see the details inone of last post .

where as Profit and Loss report can be best build and understand as:

P rofit and Loss A / c Conce p t

Profit and Loss can be based out of these basic concept as discussed in one of my post .

ACCO UNT I NG P ER I O D

y Expenditure during A /c period which are also expenses of that period.y Expenditure during the A /c period which will become expense only in future periodsy Expenditure during the previous A /c period which will become expenses during the

current A /c periody Expense of the current A /c period which have not yet been paid

RE ALIZ AT I O N C O NCEP T


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What is important here is

y point of time or revenues earnedy recognition of revenues

ACCR UAL C O NCEP T

Normally companies measure there profits by change in Owners equity , revenues increases OE,expenses decreases OE

MATCH I NG EX P ENS ES WI TH REVE NU E

y Income (profit) - the excess of revenues over expenseso Revenues - Expenses = Profit

y R etained earnings - additional owners equity generated by income or profitso Revenues increase owners equity.o Expenses decrease owners equity.

Balance sheet and P& L- Driven by Transaction

In last post we have seen BS provides a snapshot of an entitys financial position at an instant intime., where as P&L A /c provides a moving picture of events over a span of time and explains thechanges that have taken place between BS dates. This can be best described as below figure.

Understanding Cash Flow Statement

Lets start with the basic concept ;

W hy I s Cash So I m p ortant ?"

C ash is the necessary element which runs the business. We need to know where the cash comes from(sources, or inflows) and where it is spent (uses or outflows).

y Most of bills, Salaries, etc are paid in cashy Most vendors are paid in cash

o Even on a good day, the small business will owe its debts in 30 dayso Those purchasing products/services from the small business though will have 90 days

to pay their debts.


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W hat is Cash Flow ?

y C F Statement is a 'flow' statement.y C F Statement indicates changes that took place between tow successive Balance Sheets.y The statement of cash flows provides a thorough explanation of the changes that occurred in a

firm's cash balance during the entire accounting period.y The statement of cash flows reports cash receipts and payments of a company during a given

period for operating, financing, and investing activities.y C

ash includes cash and cash equivalents.

Cash Flow & Accrual method of accounting

C ash Flows, although related to net income, are not same. This is because of the accrual method of accounting. A s we know,under accrual accounting, a transaction is recognized on the incomestatement when the earnings process is completed, that is , when the goods and /or services havebeen delivered or performed or an expense has been incurred.

..that mean ...Cash Flow Statement

y C ash flow statements A RE NOT budgetsy C ash flow statements are concerned only with AC TUAL cash inflows and outflows .

A n Example of the Difference Between Budgets and C ash Flows

If you take a Prepaid insurance for a year costing $3,000 or $250 a month

1. A budget will account for 12 equal installments of $2502. A cash flow statement will recognize a 1-time only outflow of $3,000.3. You can also see more details inflows and Outflows attributes at the end.

W hy do we need CFS as financial re p orting ?

y Balance Sheet & P&L A /c is not sufficient in term of pure financial Reporting.y It shows the relationship of net income to changes in cash balances.y It reports past cash flows as an aid to:

o Predicting future cash flowso Evaluating the way management generates and uses casho Determining a company's ability to pay interest and dividends and to pay debts when

they are duey It identifies changes in the mix of productive assets.y The statement of cash flows, along with the income statement, explains why balance sheet

items have changed during the period.y Some time , there is legal rules to provide the cash Flow statement.

Do you know .. W hat is Float ?

Float refers to the difference in time between when the check is deposited and cash is received.

This makes a significant impact of your C FS.

Statements of Cash Flow


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A statement of cash flow is one of several financial statements that public companies construct andshare with their stake holders. In general this statement will include a formula or calculation thatconsiders:

C ash and C ash Equivalents (Beginning)+ C ash from Operations- C ash Flows from Investing A ctivities+ C ash Flows from Financing A ctivities= C ash and C ash Equivalents (Ending)

I ts all about R elation shi p

This is family pack of financial reporting. The relationship among the balance sheet, incomestatement, and statement of cash flows:

CASH FL O W CLASS I FI CAT I O NS- Activities Affecting Cash

C ash Activities are divided into three main categories

y O p erating activities - transactions that affect the income statement ..these are mostly usedfor Normal day-to-day activities

o C ash effects of revenue and expense transactions Deal with the income statement accounts Included interest paid (on debt) and income taxes (to the government) which

enters in the determination of net income C ash receipts from sales of good and services,miscellaneous income C ash payments for inventory, wages, insurance, utilities,rent C hanges in current asset and liability accounts from the prior year.

y I nvesting activities - activities that involve (1) providing and collecting cash as a lender oras an owner of securities and (2) acquiring and disposing of plant, property, equipment, andother long-term productive assets ...like changes in long term assets and investment

y Financing activities - activities that include obtaining resources as a borrower or issuer of securities and repaying creditors and owners..and these are basically changes in equity andnon Operating Liabilities

O p erating Activities

C ash Inflows are typically Understood as


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y C ash Receipts from sale of goods/rendering of servicesy C ash Received from royalties, fees, commission, etc.y Other operating receipts

where the cash outflow can be best understood as:

y C ash payments to suppliers for Goods/servicesy C ash payments to employeesy

Interest and taxes paidy Other operating cash payments

I nvesting Activities


y Sale of property, plant, and equipmenty Sale of securities that are not cash equivalentsy Receipt of loan repayments


y Purchase of property, plant, equipmenty Purchase of securities that are not cash equivalentsy Making loans

Financing Activities


y Borrowing cash from creditorsy Issuing equity sharesy Issuing debt securities


y Repayment of amounts borrowedy Repurchase of equity sharesy Payment of dividends

How To Develo p an Accurate I nitial Cash Flow P rojection

y C ontact vendors/suppliers and ask about payment termsy C heck with credit card companies and get information about when the accounts will be

processed as well as what the percentages are.

Develo p ing a Cash Flow Statement

y The cash flow statement of a small business is different than that of a corporationy C orporation will have operating, investing, and financing sections to their Statement of C ash

Flowsy The small business is only interested in the cash flows resulting from operations

o Operations signifies all the cash flows in/out of the business


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y A cash flow statement will maintain an accurate representation of the overall cash position if used effectively

y A cash flow statement begins with expensesExamples of possible expenses

o Salarieso C ost of Goods Soldo Taxeso Office Supplies (often underestimated)o Rento Most important to account for EVERY expenseyou have defined in system.

y Begin accounting for revenues once done with all expensesy If possible, the company should separate their revenues into separate categories

It will help focus the business on which sectors of its revenues are important and will influencethe operations of the business

Do you know W ho can utilize information p rocessed by the SCF ?

These is utilized by Management,Investors

Cash Flow Statement in O racle Financials ?

y Important to know, there is no seeded report that cater the need for C ash Flow.y Most of cash flow statement is prepared by account department.y We can achieve C FS by using OF A .y We can also generate C FS by FSG, but it is bit difficult, unless until, the format is not very

simple.y you can pull the reports based out of data in the GL_B A LA NC ES table.

Accounting fundamentals for Techies : Encumbrance

Before start of this topic you should be clear on these term;

y Encumbrance This is your any pre-expenditure, such as a purchase order, which will lead to a charge againstan account.

y CommitmentA journal entry you make to record an anticipated expenditure, as indicated by approval of arequisition.

y O bligation A n encumbrance you record when you turn a requisition into a purchase order.

So... W hat Are Commitments ? C ommitments are obligations for future expenditures made , and this should be for an employee orvendor PO's. C ommitments are tracked to help departments forecast their expenditures so that theydo not exceed their budget available.

If you are using encumbrance you can get answer of these two question.

y H ow much do I have left to spend?y A lert me if spending too much from allocated budget.


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H ow much I left to spend , will be based out of these formula

Funds A vailable = Budget - Actual - Encumbrances.

Budget is always unaltered, Encumbrances is reversed when matching to A P invoice.

O racle Vanilla encumbrance accounting -Briefing

Oracle encumbrance accounting feature is supported by a process called funds reservation, which is

implemented in the General Ledger as a user-exit or spawned program.

What is required if enabled Purchase Orders and Purchase Requisitions to first undergo a funds checkwhen they are submitted. The system checks the line amount(s) of the requested purchase againstthe budget for the GL account(s) and alerts the user if that PO or Req. will exceed the funds on theaccount.This process of verification of available funds based on pre-defined summary templates.

Journals are then recorded in a special table called GL_B C _P AC KETS, where they will sit temporarilybefore being converted by a concurrent process called Program C reate journal into permanentencumbrance journals.

The modules capable of initiating such transactions are the purchasing module for the creation of

three documents, Standard Purchase Order, Requisition and Purchase Order Releases and theA ccounts Payable module for the different invoices. It is possible to control the type of encumbrancecreated by these modules via the set-up of the applications.

The benefit of the encumbrance accounting feature is the ability to have the system control theexpenditure budget from the General Ledger, reducing the risks of potential over expenditure.

This is often a legislated requirement for public organizations.


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he transactional flow has funds reservation being performed through the GL_B C _P AC KETS table whenreserving funds for purchasing documents, and through the GL_INTERF AC E table for receipt accrualswhich can be either On Receipt or at Period End. The funds checker process takes place wheneverfunds reservation and/or adjustment is made.

A fter transactions have taken place in Purchasing, it will become necessary to run the C reate Journalsprogram in GL. This program essentially sweeps through the GL_B C _P AC KETS table and creates

journals for the entries as entered.

Essentially this process allows the different manager to understand their funds available based onthe following formula.

Funds A vailable = Budget Actual Encumbrance

The Oracle system has the ability to control this formula per fiscal period using the different balancestracked within GL_B A LA NC ES (Essentially the General Ledger) by PTD (Period To Date), QTD (Quarter

To Date), YTD (Year To Date),PJTD (Project To Date).

If you are coming from other Products like S AP or SUN , let clear these two terms in Oracle context inProject module specific.

y A ctual Transactions - Actual transactions are recorded project costs. Which may includeslabor, expense report, usage, burden, and miscellaneous costs.

y C ommitment Transactions - C ommitment transactions are anticipated project costs. Suchexamples include purchase requisitions and purchase orders or contract commitments.

Basic O racle P rocess

The basic process flow for encumbrance accounting activity related to Oracle Purchasing typically is asfollows:

1. C reate a requisition.2. A pprove and reserve funds for the requisition.3. A uto C reate requisition onto a purchase order.4. A pprove and reserve PO (which automatically reverses the requisition funds reservation)5. Receive against the purchase order (either period-end or online accruals) and the funds are

reversed for the amount received and entered against the charge account.


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Take a note, funds reversal also occur when documents are cancelled or finally closed.

Requisitions, when autocreated onto a purchase order, have their funds reversed either when the POis approved and reserved or when the requisition line(s) are rejected or returned.

O racle P roduct associated with encumbrance

y General Ledgery Purchasingy Payablesy Projectsy Grants

Next will see A ccounting Treatment in encumbrance.

Accounting fundamentals for Techies : Encumbrance P artII

This post is answer of reader's query which was pending from long time.

To elaborate in details , lets take sample case with two items.

Now lets take a quick look on accounting entry:

R eserve R equisition


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Dr C ommitments (Expense) 500C r Reserve for Encumbrance (Expense) 500

Dr Commitments (Inventory) 800Cr Reserve for Encumbrance (Inventory) 800

Autocreate P urchase O rder and R eserve

Dr Obligations (Expense) 500

Cr Commitments (Expense) 500

Dr Obligations (Inventory) 800Cr Commitments (Inventory) 800

Goods are R eceived

Dr Receiving 800Cr Accrual 800

Good are Delivered to the Final Destination

Dr Expense Account 800Cr Receiving 800

Dr Reserve for Encumbrance (Inventory) 800Cr Obligation (Inventory) 800

P eriod End Accrual P rogram is e x ecuted

Dr Expense Account 500Cr Expense Accrual 500

Dr Reserve for Encumbrance (Expense) 500Cr Obligation (Expense) 500

Ne x t P eriod is O p ened

Dr Expense Accrual 500Cr Expense Account 500

Dr Obligation (Expense) 500Cr Reserve for Encumbrance (Expense) 500

I nvoice Matched to PO and R eserved

The ITEM Y was invoiced for 900, 100 more than the PO

Dr Invoice Encumbrance (Expense) 500Cr Obligation (Expense) 500

Dr Invoice Encumbrance (Inventory) 100Cr Reserve for Encumbrance (Inventory) 100

P ayables to GL Transfer p rogram


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Dr Inventory Accrual 800Dr Variance Account 100Cr Liability 900Dr Reserve for Encumbrance (Inventory) 100Cr Invoice Encumbrance (Inventory) 100

Dr Expense Account 500Cr Liability 500Dr Reserve for Encumbrance (Expense) 500Cr Invoice Encumbrance (Expense) 500

W hen P ayment is made

Dr Liability 1400C r C ash 1400

So therefore summrizing all transaction , here is how Encumbrance fit into P2P cycle.

Q uick R eca p on some standard defination :

Budgetary Control - keep track amounts of and determine if there is available funds within a givenbudget with Funds A vailable = Budget - Encumbrance - A ctual

Encumbrance Accounting - the creation of accounting journals earlier in the the document cyclethan with standard accrual (ie during PO/Req time instead of Receipt/Invoice)

R eference


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y Metalink Note 121858.1 Purchasing Encumbrance A ccounting C oncepts and Process Model

Contra Charging to R 12 A P/ AR Netting

1. C ustomer ABC raise an order to your company and your have made shipment of goods theyhave requested and you have raised an invoice of X amount, that you are expecting the

money should be paid by customer.2. Same time , you have some taken some services to the same customer which is a vendor in

your Payable, and now you have liability to pay the amount Y, you received against PO.

What the business demand here is "Net off your supplier balance in A P (Payables) with customerbalance in A R (Receivables)"

These kinds of business scenario always exist, specially if you are dealing with client whose line of business is either A irlines or C argo or H ealthcare domain. Such events are always there, thereforedesigning, configuring and identifying such need is foremost important step while implementing ERP.

What we seen after 11.5.9 , where similar kind of functionality Oracle has offered in term of " C ontraC harging" which initially limited in European Localization and on and after 11.5.10, the samefunctionality have been standardize and incorporated in the product.

Contra Charging

C ontra C harging allows you to select customer and suppliers through the screen and net theirbalances. This will submit two requests used to populate the Receivables and Payables TransactionInterface. This credit memos can then be imported through the standard invoice import in A R andA P.The base Functionality that currently exist in 11.5.10 are:

y Use the C ontra C harging window to physically match the customer to the supplier and allocate

an amount for contra chargingy A utomatically populate the A R and AP Invoice Interface tables to create credit memos for the

source C ontray Import the invoices

o in A R with the Submit Invoice Import window, using the source C ontrao in A P with the A uto Invoice Import Program on the Run A uto Invoice window, using

the source C ontray Use the standard functionality to post the imported credit memos to Oracle General Ledgery Use the C ontra Netting Report

o to report on the netted contra charging transactionso to check that the contra charging has been carried out successfully in Oracle

Receivables and Oracle Payables

How to make Contra Charging Feature enabled

Follow the below mentioned steps and you should be able to use the contra charging functionality.

1.Define document sequences, assign the document sequence to C ontra document category.

y You can assign a unique document sequence to each invoice and payment document inyour Payables system so you have a unique identifier for each document.


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y A document category is a set of documents (invoices or payments) that share similarcharacteristics. You can assign a single document sequence to one or more documentcategories.

y Use assignment window in System administrator responsibility to attach the documentcategory with the document sequence created for contra charging invoices.

2. Setup Payables C ontra Source.

A lookup is any predefined value that was not defined in a setup window.

3. Setup user profile for AP Responsibility, including the following:

y Tax: A llow Override of Tax C ode (Yes)y Tax: A llow Override of C ustomer Exemption (Yes)y Sequential Numbering (Partially Used)y JG: C ontra - Include Future Dated Payment in Supplier Balance (Yes)

4.Define Document C ategory called ' C ontra'.

5. Define Payables Lookup for ' C ontra'.

A lookup is any predefined value that was not defined in a setup window. Use the Oracle PayablesLookups window to review and maintain sets of values, or lookups, that you use in Payables. Use theOracle Payables Lookups window to create a new Payables lookup for contra charging.

This New C ontra Lookup C ode will be used as a source when the C ontra C harging C redit memos arecreated.

6. A ssign a ' C ontra C harging' Menu to ' A P_N A VIGA TE_GUI12' main menu,which tied to APResponsibility.

To attach the C ontra C harging Form to the Existing Payables Responsibility, attach

JG_ C ONTRA _ CHA RGE_GUI Sub Menu to A P_N A VIGA TE_GUI12 Main Menu.

Navigation Path: System A dministrator responsibility: A pplication: Menu Form

7. H aving created the new form ' C ontra C harging', enter C ontra C harging Transactions, then 'SubmitC ontra transaction.

W hat's new in R elease 12

When a trading partner is both a customer and a supplier, an agreement may be made to offset openreceivables against open payables items. Netting Agreements add trading partner terms aswell as deploying company controls. A selection program automatically pulls information from Oracle

Receivables and Oracle Payables taking into consideration discounts, late fees, and withholding taxesprior to determining the final netting amount. A review process and trading partner approval affordfurther verification to support the netting event.

The matching of open receivables and open payables is automated. You are now able to determinewhether you or your trading partner has a greater balance outstanding and update your books, collectpayments or make payments accordingly.


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Benefits: A P/ A R Netting provides for the ability to collect on your receivables balances with the amountowed for your purchases by offsetting one against the other.This will Reduce bank C harges , FewerTransactions to Process and thus significant C ash flow Improvement.

From 11i to R 12

R12 Netting solution replaces 3 solutions(FV,JE,IGI) in 11i.

In R12 the C ontra C harge functionality has been optimized and therefore changed into the AP/ A RNetting functionality. In the Payables module as well as the Receivables module, there is a Nettingsubmenu.

y Payables: Payments -> Entry -> Nettingy Receivables: Receipts -> Netting

Suggested R eading

y Oracle Financials C ommon C ountry Features user guide.

Netting : An O verview

This brief is meant to walk through ,the concept to someone not very familiar with accounting in realworld...so here to go..(adopted)

When trading partners agree to offset their positions or obligations, they are netting. By doing so,they reduce a large number of individual positions or obligations to a smaller number of positions orobligations, and it is on this netted position that the two trading partners settle their outstandingobligations. Besides reducing transaction costs and communication expenses, netting is importantbecause it reduces credit and liquidity risks, and ultimately systemic risk. For a non accountingpersonal risk can be best understood as :the risk of a trading partner not fulfilling his obligations in fullon due date or at any time thereafter is a risk that affects all aspects of business.

Definition of Netting

In this method of reducing credit, settlement and other risks of financial contracts by aggregating(combining) two or more obligations to achieve a reduced net obligation.

y Netting rules a basic part of master agreements.y Netting rules define precisely the netting of positions or claims between counter parties.


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Benefits of Netting

Netting potentially address four major risk in financial area, there are

y Reduction of credit risky Reduction of settlement risky Reduction of liquidity risky Reduction of systemic risk

Ty p es of Netting

y Payment Nettingy Novation Nettingy C lose-Out Nettingy Multilateral Netting

P ayment Netting

A lso called Settlement Netting or A lso called "Position or Accounting Netting".

On a payment date, each party will aggregate the amounts of a currency to be delivered by it, andonly the difference in the aggregate amounts will be delivered by the party with the larger aggregateobligation.

This can be best understood as:

y Daily settlement or offsetting of several, due claims in the same currencyy Reduction of transaction costs, settlement risk and liquidity risk.y No impact on credit risk.

Ty p es of P ayment Netting Agreements

y Master Agreement with a Payment Netting C lausey Stand- A lone Payment Netting Agreementy Informal, ad hoc agreement

Novation Netting

If the parties enter into a transaction which gives rise to an obligation for the same value date and inthe same currency as an existing obligation, then the two obligations are cancelled and simultaneouslyreplaced with a new obligation for the net amount.

y Settlement of not yet due claims in the same currency and the same maturity.y Reduction of limit usage and credit risk.


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Two Types of Novation Netting:

y Matched Pair Novation Nettingy C omprehensive Novation Netting

Matched P air Novation Netting

Netting only occurs if the two transactions involve the same pair of currencies.

Ex am p le1 : Matched P air Novation Netting

Deal 1: Buy JPY / Sell USDDeal 2: Buy USD / Sell EURDeal 3: Buy EUR / Sell JPY

No two deals involve the same currency pair, and therefore no netting under matched pair novationnetting.

Example 2: Matched P air Novation Netting

Example 3: Com p rehensive Novation Netting

A P ayment Netting vs Novation Netting

y Payment Netting reduces settlement risk, but does achieve netting for balance sheetor regulatory capital purposes because the transactions remain in gross.

y C ontrast with Novation Netting, which achieves true netting through the cancellation

of offsetting transactions and their replacement with a new, net transaction.

Close- O ut Netting

Effective upon a default:

y Existing transactions are terminatedy Termination values are calculatedy Termination values are netted to arrive at a single net amounty Recourse to credit support, if any


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That mean:

y Settlement/offsetting of not yet due claims in different currencies in case of a defaultevent or an early termination event of the contractual relationship.

y A ll outstanding gross obligations or payments are replaced by a single obligation orpayment

Multilateral Netting

Bilateral Netting is between two parties.

Multilateral Netting involves netting among more than two parties, using a clearing-house or centralexchange.

When it come to party , it may be two party interacting with third party. Th two party may be yourother entity in the same instance, which do business internally, what we called Intercompany.

Multilateral netting is a settlement mechanism used by companies to pay for goods and servicespurchased from affiliated companies. The netting process consolidatesintercompany transactions and calculates settlement requirements internally instead of using externalpayment systems. Netting is typically used by companies with a number of affiliates in differentcountries. By netting, these companies reduce bank fees, currency conversion costs, bank balancesand improve operating efficiency.

Will take this in some more details in another post.

R equirement Ma pp ing with Ex isting O racle EBS P roduct

Still these two processes are not fully enabled in Oracle EBS suite. Though first type of nettingsomehow mapped as C ontra C harging in post 11i10 releases where as in R12 this functionality can bemapped as part of A P/ A R netting, a new feature of R12 .

H ere is summarize list of the different types of netting and there corresponding netting.


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A bit on I FR S

Sometime back, I was talking to one of my accountant friend who pointed me some recent changes in

IFRS ,and provided some link for the awareness and to understand the impact in EBS suite. I am notgoing to put the details, rather will walk through some information which is good to have with ERP

consultant who is dealing with Financial products.

W hat is I FR S ?

IFRS ,International Financial Reporting Standards (IFRS), together with International A ccountingStandards (I A S), are a " principles-based " set of standards that establish broad rules rather thandictating specific accounting treatments. From 1973 to 2001, I AS were issued by the InternationalA ccounting Standards C ommittee (I AS C ). In April 2001 the International A ccounting Standards Board(I A SB) adopted all I A S and began developing new standards called IFRS.

IFRS are used in many parts of the world, including the European Union, H ong Kong, A ustralia, Russia,South A frica, Singapore and Pakistan. Nearly 100 countries currently require or permit the use of, or

have a policy of convergence with, IFRSs. H ere is list of countries which adopted IFRS.

W hat is meant I FR S for O racle eBusiness consultant / ER P Consultant ?

A s we are quite aware G AA P which is so called Generally Accepted Accounting P rinciples forShareholder Reporting.The term is not drafted by a legislature.

and ,in term of A ccounting Principles this can be best understood as:

IFRS = Financial Reporting standards = Balance Definitions < /FONT >

which internally means more in term of " disclosure Requirements " and " Balance Definitions " forfinance controller.

I FR S - W hat it is for ?

The Other things IFRS would do is:

y Providing a bookkeeping rules rather many of us have impression that they have some rule setfor accounting

y It will do Shareholder Reporting , and this is important when :o A group of companies owned by a Public companyo Not the individual companies

y It will also do external reportingo To your owners (investors, shareholders)o Through their stock markets

y Management Reportingo Maximize investors returns, measured only with IFRS

o Segment Reporting disclosure

I FR S - W hat it is not for ?

A nd more important it should be understand that IFRS is not meant for:


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y Statutory Reportingy Tax Reportingy Regulatory reportingy Subsidiary reporting

I FR S How new is it ?

y IA SB has been around since 1980sy

IA

S/IFRS pretty much converged with theA

mericansy If your ERP supports US G AA P, it supports I AS/IFRSy Key premises (recognition, measurement):

o Mark to Market when possibleo Reality of the Balance Sheet real assets, real liabilitieso Income Statement analyses the change in wealtho Deep Disclosure: owners right to know

US GAA P vs. I FR S - A difference

While looking to some more information on internet ,I discovered a nice article from the siteof Fulcrum Inquiry who pointed out the key differences(adopted) between the two standards in thereone of the article .


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Dont worry about your ER P Side y Maybe requires some reconfiguration, maybe requires some data analysisy We have notice there is some big change in R12 A R to meet revenue recognition , R12 is

partially on track for IFRS fitness in suite.y The new R12 Global A rchitecture introduced the concept of ledgers which has capability of

providing differing accounting representations; one ledger for example could conform to IFRS,another to local G AA P.

y From the C urrency area we have already noticed some big changes like:o Balance level Translation or Remeasurement in Ledgers within Ledger sets, run at

one clicko Balance & Activity level Translation or Remeasurement in Financial C onsolidation H ub


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o A nother is enhanced Revaluation [Functional C urrency term dropped: conflicts withIA S 21 / F A S 52]

Those who are looking for some more insight about the changes suggested to refer whitepaper mention in the last.

Some more from O racle blog

y IFRS Bandwagon heading for US? A re you ready to board?

Keep watching this space for having some more thoughts and insight for IFRS from Oracle .

Further R eading

y US G AA P v. IFRS: The Basics y PWC Blog for IFRS y White Paper " The Implications of the International Financial Reporting Standards (IFRS) on

Finance Systems "

Oracle Accounting - Accounting Basics

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